Cash Rent on the Auction Block | Rent Auctions Give More Farmers a Shot at Renting Land, But Make Transaction Details Public

Think different: When is private lease negotiation a better fit?
Are you offering sensitive or erodible ground for rent? Does your farm have buildings or fences that need to be taken care of? Do you want the land farmed in a certain way? Do you want to avoid tenants who mine soil fertility or ignore weed resistance?
If so, you’ll probably be better off negotiating an agreement with a tenant, one-to-one, rather than renting your farm to the highest bidder at a public auction, says William Edwards, Iowa State University agricultural economist.

Cash rent went on the auction block in several areas around the Midwest last fall and winter. In Iowa, 3,300 acres of cropland brought rent bids ranging from $325/acre to $520/acre, stunning some market watchers. In southern Minnesota, several cash rent auctions last fall brought over $400/acre. In eastern South Dakota, bids at rent auctions in September and October reached $300/acre or more.

Both tenants and landowners are famously tight-lipped about farmland lease rates. Cash rent auctions focus a public spotlight on these traditionally secretive agreements. In a market that’s notoriously opaque, public rent auctions are an effective way to test demand and prices, says Iowa State University agricultural economist William Edwards. And even though these deals are rare, they get so much publicity that they may create ripples in the larger rental markets by fueling landowner expectations, he says.

“We tend to see them when there’s uncertainty about markets,” like now. In Iowa, for example, average cash rents for corn and bean land have vaulted more than 30% since fall 2010, according to Edwards’ annual survey of Iowa cash rents. Recent public rent auctions furnish transparent examples of this trend.

“Whether that transparency is a good thing is a personal question,” Edwards says. The exposure makes a lot of farmers queasy. And “there’s no question that it weakens the traditional tenant-landlord relationship,” he says.

Still, “I think we’ll be seeing more of them,” says Bob Hansen, an auctioneer from Salem, SD. Open, competitive bidding at “a well-advertised public auction is the best way to discover what somebody is willing to pay for a particular piece of ground.”

Hansen called two cash rent auctions last fall: The winning bid to lease a farm near White, SD, (productivity index rating 82) was $355/acre/year for a two-year contract. A farm near Manchester, SD, (productivity index rating 72-77), brought a top bid of $300/acre/year for a three-year agreement. Both farms rented for more than most people expected, Hansen says. The pre-auction cash rent on the two farms was less than $100/acre.

“Landowners like these deals,” he adds, but “tenants and their neighbors are not real fond of them because everybody knows what you’re paying. It’s all public knowledge.”

Everybody gets a chance

On the other hand,rental auctions give any qualified farmer a shot at leasing available land – a rare opportunity in today’s tightly held farmland markets, says Allen Hughes, an auctioneer from Glenwood, Iowa. He has called five rent auctions in the last three years. In February, he handled a rent auction of 3,336 acres in central and north-central Iowa, owned by the Charles Lakin family of Omaha, Neb.

Open auctions “give everybody a fair chance,” current tenants included, Hughes says. The Lakin auction at Mason City, Iowa, attracted 75 registered bidders. Nearly half of the pre-auction tenants were the top bidders and will continue to farm the land, Hughes says.

Competitive bidding leads to top prices

Cash rent auctions “set the stage for top rents,” says University of Nebraska Agricultural Economist Bruce Johnson, who tracks Nebraska land markets. Winning bids on the Lakin farms in north-central Iowa, for instance, averaged $486/acre/year for two-year leases. Top-quality land in the region is renting for an average of $331/acre this season, according to Iowa State University’s 2012 rent survey. But there’s a wide range of values, the survey found, with lows around $200/acre and highs topping $450/acre.

In southeast Minnesota last fall, “There were several rental auctions that resulted in rental rates on average land of over $400/acre,” says appraiser Gerald Dee, AgStar Financial Services, Rochester, Minn. Typical fixed cash rent for 200-bu. corn ground in the area is around $300/acre this year, he estimates.

Likewise, in western Kansas, a January, 2011 cash rent auction in Sheridan and Thomas counties attracted over 90 registered bidders, and garnered rents “that were considerably higher than what most farmers were expecting,” says appraiser Mike McKenna, Jennings, Kan. Winning bids ranged from $90 to $140/acre/year on five-year contracts. These rates appear to be “quite a bit higher than current rents” this season, too, McKenna adds.

However, crop-share leases are still the rule in this region, so “it’s difficult to know what the going rate should be for fixed cash rent,” he notes. The cash rent auction got a lot of attention, and he suspects that both farmers and landlords “kept it in mind when renegotiating existing leases.”

Too public for some

Even though cash rent auctions often generate top returns for landowners, they’re too public for farm manager Jeff Troendle, Hertz Farm Management, Waterloo, Iowa. “The tenant has to bare his soul to all his existing landlords. We don’t subscribe to that.”

In cases where competitive bidding is appropriate, he prefers sealed bid auctions, a more private alternative. “We request bids from farmers and they mail in what they’re willing to pay. You don’t get the fervor of a public auction, but you don’t get the exposure, either.”

The landowner retains more choice, too, he adds. “We don’t necessarily take the top bid. We want to make sure the farm is well cared for, and the top bidder may not be the best for that.”

Landowners can do something similar if they want to entertain competitive rent bids, Edwards says. “The landowner can advertise and collect bids until a certain date, and then choose a tenant.”

Yet despite the recent turmoil in cash rent markets, “I still see strong loyalty between landowners and tenants,” says Nebraska’s Bruce Johnson – “as long as rental arrangements stay within the fence line of fairness.” There’s nothing wrong with offering or accepting a sweetheart deal, he says, provided it’s made with eyes open. But if tenants let rents get too far out of line with prevailing rates, “landowners might say, ‘Enough of this! We’re putting it out for competitive bids!’”

For their part, landowners should keep in mind that “loyalty has to go both ways,” Troendle adds. “It’s hard to get tenants to do the right thing if they are always worried about losing the land.”